Tax Law - cases

Exercises and case studies

Case study 1

Country X decided to introduce a domestic rule that limits the deduction of interest for business activities up to 30% of the total amount of interest paid either domestically or internationally by a business. Do you think that the new domestic rule in Country X might conflict with any of the principles of taxation already studied?

The principle in contrast with this rule is the Ability-to-pay. That is, you shouldn’t pay more than you have. Recognized in many countries at constitutional level. This case is happening now in Germany. Also, tax neutrality is affected.

Do you think that it would make a difference either whether those principles are expressly recognized within domestic law, supranational law (EU law), or international law?

It could make a difference if it is at national level, people or corporations will just go somewhere else where it’s cheaper, while if it is at European or international level, corporations must accept it because it’s the same everywhere. International law is a tax treaty between two countries, while at the level of EU tax law, you have to implement it all over the other EU states.

Case study 2

Country X has a corporate income tax with a tax rate of 25% since 1999. In 2018, the tax administration issues a notice that provides that in case of tax evasion this rate will be increased up to 80% as a penalty. Do you see any problem with this new administrative notice?

It goes in contrast with the rule of law. There is a simple notice that says that the rate will increase. When you set up a tax rate, there is a limit based on logic. 80% will be confiscatory.

What principles of taxation may be jeopardized in this case?

Principle of Legality, principle of neutrality even though it is not written, and the ability to pay.

Case study 3

Dr. Tortellini is a renowned tax expert who affirms in his last paper that a VAT rate of 10% has indeed a regressive effect. Do you agree with his statement?

I think that it has a regressive effect because it decreases as you earn more money. Tax is decreasing according to the decrease of income.

Why? Why not?

Two families consuming food, if one family has double the income of the other, but they will consume the same, the poorer family will spend much more in proportion with the income. At the same time, a richer family will consume some other goods that the poorer family won’t spend. The consumption is not correlated with the increase of income; VAT is regressive.

Case study 4

Dr. Tortellini is now advising Country X to implement a tax reform. He proposes to introduce a “progressive” CIT, i.e., a CIT with progressive tax rates as per the size of the firms and the income they produce. The above, according to Dr. Tortellini, will increase fairer taxes, because larger size firms will pay more taxes than smaller ones. Does Dr. Tortellini’s advice make sense?

When we have a corporate income tax, taxes are paid through investors, customers, etc. So this assumption does not make sense.

Why? Why not?

When you have a personal income tax, it is supported by an individual. In a corporation, we have many papers, and they are passing through customers, employees, investors.

Case study 5

After 20 years of living and working in Country X, Mr. Robinson and his family decide to move to Country Y. Mr. Robinson registers his children at a school in Country Y and his wife gets a job as a school teacher there too. For practical reasons, Mr. Robinson keeps his bank account in Country X and decides to lease the family house in that country. The payments of rent are deposited directly in the bank account of Mr. Robinson in Country X. In Country Y, Mr. Robinson works as self-employed, but the majority of his clients are located in Country X.

What problems do you see with regard to Mr. Robinson’s movement to Country Y?

Two issues in this case: residence and domicile. So first of all, you have to explain the characteristics of them. In Country X: he owns a house and he is renting that house, clients (he is still working in Country X). The problems: Country X applies the residency, but he is moving right now, so he lost that residence, even though he has a house in there or clients. It depends if Country X applies also domicile. So the issues are banks, clients, etc. To answer this question, you have to start from the basis: domicile and residence, and then analyzed the taxation.

In a position as a tax advisor, would you recommend him to do something different?

I would recommend closing the bank account and to eliminate connections with that country as well as possible.

Case study 6

Mr. Fletcher wants to invest in a touristic business resort in “Mojito Country” and for that purpose, he needs a legal form. The State offers the possibility to set up both corporate and non-corporate entities, including also sole proprietorship entities. The statutory CIT rate in Mojito Country is of 10% and a complete exemption of taxes is applied for individuals no matter where the income is sourced.

Should Mr. Fletcher set up a Corporate or Non-corporate legal entity to carry out his business? Does it make any difference?

I prefer to carry out a Non-corporation because it is not liable for taxes as an entity itself, instead of paying a CIT of 10%, and also because individuals are exempted of taxes.

What are the advantages of both options?

• Corporate: Solid legal structure, giving capital, giving assets.
• Non-Corporate entity: From a legal perspective, is very easy to manage for accounting purposes and not many legal expenses.

Would your answer vary if I would say that the effective CIT rate in Mojito country is an average of 0.001%?

Yes, I will, because the rate is really lower than 10%. The difference is so minimum that he will consider building a corporation.